*Disclaimer- The story is published as it gives insight in to financial inclusion in India (although not explicitily but implicitely). Also can help to cite as a case study in answers if required.
The story of Bandhan’s rise from a microfinance institution with a large footprint to a universal bank is the theme of Tamal Bandyopadhyay’s latest book, titled Bandhan: The Making of A Bank.
The importance of Tamal’s book on Bandhan is that it maps the early challenges with an acute understanding of how the microfinance industry has itself gone through ups and downs.
The book has a foreword by Kaushik Basu, Chief Economist of the World Bank, and a former Chief Economic Advisor to the finance ministry.
One of the big problems in Indian business is scaling up. You become successful as a small entrepreneur through hard work, grit and guts, and then either the regulator or politicians get in the way. If you are a small scale manufacturer, you get tax benefits that you are reluctant to lose when you want to scale up. If you are a microfinance institution, the freedom you enjoy from excess regulation disappears if you want to become a bank.
Luckily for Chandra Shekhar Ghosh and his Bandhan Financial Services Ltd, the regulator had a change of heart just at the right moment when he was ready to outgrow his microfinance roots. Thanks to Raghuram Rajan’s three-year tenure as Reserve Bank Governor, the central bank shifted its focus from one of excessive caution on licensing to opening the gates to more competition. After licensing just about a handful of banks in the previous two decades, the RBI opened up to a wide variety of differentiated banks, including payments banks, custodial banks, wholesale banks and small finance banks. And yes, Bandhan got a universal banking licence in 2014 along with infrastructure financing company IDFC.
No one is better suited to write this book, for Tamal is both an insider and an outsider to Bandhan. Arguably the best banking journalist in India, Tamal spent most of his journalistic career covering banking and finance at several newspapers, and, when Bandhan was ready to launch, he turned advisor to Chandra Shekhar Ghosh. This enabled Tamal to bring his outside-in view of the banking universe to the inside-out reality faced by Ghosh as he readied himself for the big league.
That Ghosh has so far proved the RBI’s decision right goes without saying; in its very first year as a universal bank (2015-16), Bandhan managed to raise over Rs 15,000 crore as deposits, enabling it to finance its loanbook of over Rs 16,000 crore more cheaply than it could have as a microfinance institution. For a microfinance institution that had grown over 2,000 branches in 22 states in just over a decade, this growth may even appear underwhelming, for becoming a bank means more of your resources get locked up on cash and statutory reserves, maintaining branches and treasury operations that involve employing high-cost people; on the other hand, Bandhan’s social purpose is to serve millions of poor borrowers, which means deploying lots of feet on the ground to collect dues every week. The poor are good credit prospects, but only if you can meet them personally at frequent intervals to keep up the relationship and encourage them to maintain a good credit record.
The challenge – raising money from the better off to deploy in the boondocks – is not going to go away any time soon, for Bandhan will have to manage the parallel ecosystems of being both a regular modern bank that urban customers want and the people-heavy business of microfinance lending.
Ghosh had not initially set out to be banker to the poor, but he got his “eureka” moment in the 1990s when he found a guy in a Royal Enfield mobike collecting Rs 5 as daily interest from women vegetable vendors on a loan of Rs 500. The interest cost, when calculated annually, worked out to 730 percent, but the women weren’t complaining for their daily margins were higher. That’s when Ghosh decided this was where he needed to be: helping the poor with lower interest costs.
The importance of Tamal’s book on Bandhan is that it maps the early challenges of Ghosh with an acute understanding of how the microfinance industry has itself gone through ups and downs, especially during the Andhra Pradesh crisis of 2010-11, when excess lending led to borrowers being unable to repay. Politicians messed it up fully by hamhanded laws. The industry then went nearly bust in that state. Tamal’s book also includes two chapters on two microfinance high-fliers, Vikram Akula of SKS, and Vijay Mahajan of Basix, both laid low by excessive hubris and over-ambition in an under-regulated industry with high risks.
Bandhan luckily was not part of the Andhra melee, but it must have learnt useful lessons anyway. In Tamal’s book, Ghosh emerges as the one real hero of microfinance, with his innate belief in lending to the poor and a commitment to conservative lending practices. He started out be creating a non-profit entity, which then morphed into a for-profit non-bank finance company and finally a bank.
Author of two previous books, Bank for the Buck, an insightful work on the rise of HDFC Bank as India’s most valued bank, and Sahara: The Untold Story, which chronicles the missteps of Subrata Roy and his fall from grace that ended with his arrest by the Supreme Court in 2014, Tamal brings both a storyteller’s gift and an expert’s knowledge to bear on his subjects. Peppered throughtout Bandhan, you will find anecdotes (monkeys apparently chewed up the bank’s VSAT links in Uttar Pradesh, and the kitchen served as the accounts office for the old Bandhan NBFC). This is by no means a dry book on banking.
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- In the Large States category (overall), Chhattisgarh ranks 1st, followed by Odisha and Telangana, whereas, towards the bottom are Maharashtra at 16th, Assam at 17th and Gujarat at 18th. Gujarat is one State that has seen startling performance ranking 5th in the PAI 2021 Index outperforming traditionally good performing States like Andhra Pradesh and Karnataka, but ranks last in terms of Delta
- In the Small States category (overall), Nagaland tops, followed by Mizoram and Tripura. Towards the tail end of the overall Delta ranking is Uttarakhand (9th), Arunachal Pradesh (10th) and Meghalaya (11th). Nagaland despite being a poor performer in the PAI 2021 Index has come out to be the top performer in Delta, similarly, Mizoram’s performance in Delta is also reflected in it’s ranking in the PAI 2021 Index
- In terms of Equity, in the Large States category, Chhattisgarh has the best Delta rate on Equity indicators, this is also reflected in the performance of Chhattisgarh in the Equity Pillar where it ranks 4th. Following Chhattisgarh is Odisha ranking 2nd in Delta-Equity ranking, but ranks 17th in the Equity Pillar of PAI 2021. Telangana ranks 3rd in Delta-Equity ranking even though it is not a top performer in this Pillar in the overall PAI 2021 Index. Jharkhand (16th), Uttar Pradesh (17th) and Assam (18th) rank at the bottom with Uttar Pradesh’s performance in line with the PAI 2021 Index
- Odisha and Nagaland have shown the best year-on-year improvement under 12 Key Development indicators.
- In the 60:40 division States, the top three performers are Kerala, Goa and Tamil Nadu and, the bottom three performers are Uttar Pradesh, Jharkhand and Bihar.
- In the 90:10 division States, the top three performers were Himachal Pradesh, Sikkim and Mizoram; and, the bottom three performers are Manipur, Assam and Meghalaya.
- Among the 60:40 division States, Orissa, Chhattisgarh and Madhya Pradesh are the top three performers and Tamil Nadu, Telangana and Delhi appear as the bottom three performers.
- Among the 90:10 division States, the top three performers are Manipur, Arunachal Pradesh and Nagaland; and, the bottom three performers are Jammu and Kashmir, Uttarakhand and Himachal Pradesh
- Among the 60:40 division States, Goa, West Bengal and Delhi appear as the top three performers and Andhra Pradesh, Telangana and Bihar appear as the bottom three performers.
- Among the 90:10 division States, Mizoram, Himachal Pradesh and Tripura were the top three performers and Jammu & Kashmir, Nagaland and Arunachal Pradesh were the bottom three performers
- West Bengal, Bihar and Tamil Nadu were the top three States amongst the 60:40 division States; while Haryana, Punjab and Rajasthan appeared as the bottom three performers
- In the case of 90:10 division States, Mizoram, Assam and Tripura were the top three performers and Nagaland, Jammu & Kashmir and Uttarakhand featured as the bottom three
- Among the 60:40 division States, the top three performers are Kerala, Andhra Pradesh and Orissa and the bottom three performers are Madhya Pradesh, Jharkhand and Goa
- In the 90:10 division States, the top three performers are Mizoram, Sikkim and Nagaland and the bottom three performers are Manipur and Assam
In a diverse country like India, where each State is socially, culturally, economically, and politically distinct, measuring Governance becomes increasingly tricky. The Public Affairs Index (PAI 2021) is a scientifically rigorous, data-based framework that measures the quality of governance at the Sub-national level and ranks the States and Union Territories (UTs) of India on a Composite Index (CI).
States are classified into two categories – Large and Small – using population as the criteria.
In PAI 2021, PAC defined three significant pillars that embody Governance – Growth, Equity, and Sustainability. Each of the three Pillars is circumscribed by five governance praxis Themes.
The themes include – Voice and Accountability, Government Effectiveness, Rule of Law, Regulatory Quality and Control of Corruption.
At the bottom of the pyramid, 43 component indicators are mapped to 14 Sustainable Development Goals (SDGs) that are relevant to the States and UTs.
This forms the foundation of the conceptual framework of PAI 2021. The choice of the 43 indicators that go into the calculation of the CI were dictated by the objective of uncovering the complexity and multidimensional character of development governance
The Equity Principle
The Equity Pillar of the PAI 2021 Index analyses the inclusiveness impact at the Sub-national level in the country; inclusiveness in terms of the welfare of a society that depends primarily on establishing that all people feel that they have a say in the governance and are not excluded from the mainstream policy framework.
This requires all individuals and communities, but particularly the most vulnerable, to have an opportunity to improve or maintain their wellbeing. This chapter of PAI 2021 reflects the performance of States and UTs during the pandemic and questions the governance infrastructure in the country, analysing the effectiveness of schemes and the general livelihood of the people in terms of Equity.
Growth and its Discontents
Growth in its multidimensional form encompasses the essence of access to and the availability and optimal utilisation of resources. By resources, PAI 2021 refer to human resources, infrastructure and the budgetary allocations. Capacity building of an economy cannot take place if all the key players of growth do not drive development. The multiplier effects of better health care, improved educational outcomes, increased capital accumulation and lower unemployment levels contribute magnificently in the growth and development of the States.
The Pursuit Of Sustainability
The Sustainability Pillar analyses the access to and usage of resources that has an impact on environment, economy and humankind. The Pillar subsumes two themes and uses seven indicators to measure the effectiveness of government efforts with regards to Sustainability.
The Curious Case Of The Delta
The Delta Analysis presents the results on the State performance on year-on-year improvement. The rankings are measured as the Delta value over the last five to 10 years of data available for 12 Key Development Indicators (KDI). In PAI 2021, 12 indicators across the three Pillars of Equity (five indicators), Growth (five indicators) and Sustainability (two indicators). These KDIs are the outcome indicators crucial to assess Human Development. The Performance in the Delta Analysis is then compared to the Overall PAI 2021 Index.
Key Findings:-
In the Scheme of Things
The Scheme Analysis adds an additional dimension to ranking of the States on their governance. It attempts to complement the Governance Model by trying to understand the developmental activities undertaken by State Governments in the form of schemes. It also tries to understand whether better performance of States in schemes reflect in better governance.
The Centrally Sponsored schemes that were analysed are National Health Mission (NHM), Umbrella Integrated Child Development Services scheme (ICDS), Mahatma Gandh National Rural Employment Guarantee Scheme (MGNREGS), Samagra Shiksha Abhiyan (SmSA) and MidDay Meal Scheme (MDMS).
National Health Mission (NHM)
INTEGRATED CHILD DEVELOPMENT SERVICES (ICDS)
MID- DAY MEAL SCHEME (MDMS)
SAMAGRA SHIKSHA ABHIYAN (SMSA)
MAHATMA GANDHI NATIONAL RURAL EMPLOYMENT GUARANTEE SCHEME (MGNREGS)